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# How To Calculate The QBI Deduction

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The qualified business income deduction or QBI deduction is relatively new to the tax scene. It's a powerful tool in reducing your tax liability, but calculating the deduction can be tricky. Here's a step-by-step guide on how to calculate your QBI deduction.

### First, what's the QBI deduction?

It's a way for individual taxpayers to reduce their tax liability with qualified business income (QBI) they receive from partnerships, S corporations, and sole proprietorships. Generally, taxpayers can deduct 20% of QBI, qualified cooperative dividends, qualified REIT dividends, and qualified publicly traded partnership (PTP) income.

### How do I calculate my deduction?

Now that we have the basics, let's walk through calculating your deduction!

### Step 2. Calculate the QBI for each business for the tax year and your net taxable income.

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QBI is the net amount of the business' qualified items of income, gain, deduction, and loss. It doesn't include investment-related items of income, gain, deduction, and loss. These rules also apply to active and passive investments.

#### What's not QBI?

• Amounts paid for services that are your reasonable compensation*
• Guaranteed payments to a taxpayer for services performed
• Amounts paid to a taxpayer that's acting outside of his/her capacity as a partner for services
• Qualified REIT dividends
• Qualified cooperative dividends
• Income from foreign pass-through entities
• Qualified PTP income

Usually, you can deduct 20% of qualified REIT dividends, qualified cooperative dividends, and qualified PTP income, but you don't include these items when calculating your QBI. *Reasonable compensation is limited to the compensation of S corporation shareholders-employees. It doesn't apply to partnerships. [zone_spacer spacer="sm"]

#### Can I combine QBI sources?

Yes. In order to calculate your total QBI, you can combine multiple sources of income. If you have two or more businesses, you can combine the QBI, W-2 wages, and basis of qualified property for each of them. Then, you apply the W-2 wage and qualified property limitations. You aren't required to combine - or aggregate - your businesses, but it's allowed. If you do choose to aggregate, your businesses have to meet certain criteria and requirements. And, you would have to continue to aggregate in future years until circumstances change.

Now that you've calculated your QBI for each of your businesses, let's move on to calculating your limitation. Unfortunately, you may not always get to claim a straightforward 20% deduction. It may be limited.

### Step 3. Apply the W-2 wages and qualified property limitation

You must calculate your limitation if:

AND

• Your 2020 taxable income is more than \$326,600 as a married filing jointly taxpayer or more than \$163,300 as a single taxpayer

If your taxable income is less than these amounts, you don't have to calculate the limitation. You can take the straight 20% deduction. To calculate your limitation, you need to know how much the company paid in W-2 wages and how much qualified property it has. W-2 wages are the total W-2 wages the company paid to employees that are subject to tax withholding, elective deferrals, and deferred compensation. Qualified property is tangible property - personal or real - that's subject to depreciation. Land isn't qualified property. Then, you'll have to do some math. Your QBI is limited to whichever of the following options is the lowest:

OR

• 50% of the company's W-2 wages OR the sum of 25% of the W-2 wages plus 2.5% of the unadjusted basis of all qualified property. You can choose whichever of these two wage tests gives you a greater deduction.

### Step 4. This is your total deduction amount

You've successfully calculated your deduction amount! If the net amount of your combined QBI during the tax year is a loss, you carry the loss forward into the next tax year. Read 'How Do Business Losses Affect My QBI Deduction?' to learn more.

### Let's look at an example.

Mary is married. Her filing status is married filing jointly. She owns a manufacturing business that generates \$100,000 of QBI. Her taxable income is more than \$415,000. The business paid \$30,000 in wages and has \$50,000 in qualified property. Because Mary's taxable income is more than \$326,600, she can't automatically claim the 20% deduction. She has to calculate her limitation. She performs both wage tests to find the greatest deduction. Test 1: 50% of the company's W-2 wages

50% x \$30,000 = \$15,000

Test 2: 25% of the W-2 wages plus 2.5% of the unadjusted basis of all qualified property

(25% x \$30,000) + (2.5% x \$50,000) = \$8,750